CHENNAI: Real-estate developers in Chennai are seeing high land costs and regulatory overdrives eating into business potential, even as corporations wait to set up offices in the city. At about 1.5 million sq ft, new commercial realty that came up in 2014 was the lowest in a decade.

Against average demand of about 4 million sq ft, the supply will barely touch 2.5 million sq ft in the coming years, according to realty consulting firm Jones Lang Lasalle, which said there was a clear possibility of the shortage of space driving business to locations such as Bengaluru, the top destination in South India for commercial real estate.

According to JLL, completion certificates for multi-storey buildings have been few since June last year, when an eleven-floor residential block under construction crashed, killing more than 60 people. The Chennai Metropolitan Development Authority has since begun scrutinising all building plans and completion certificates. This slowed the process of issuing completion certificate, which is necessary for a building to receive water and electricity supply, and for its commissioning.

"Besides the effect of the Moulivakkam incident which has made end-clearances hard to get, fundamentals such as high land costs are making commercial realty unattractive," said Ajit Kumar Chordia, Chennai president of the Confederation of Real Estate Developers' Associations of India and managing director of Khivraj Tech Park.

The areas that are bucking this trend are the most-sought-after stretches, like the pre-toll booth stretch on IT corridor Old Mahabalipuram Road. In this stretch, just 5% of office space is vacant and rentals have surged 35% compared with 2011 levels. One acre of land on this strip costs around Rs 35 crore, 40% more compared with four years ago. With large demand from corporations and nonviable business conditions, developers are looking for help.

But for the high land cost, now is an opportune time to build offices in Chennai, said Sarita Hunt, managing director for Chennai and Coimbatore at JLL. With homes not selling as they used do, and hotels witnessing oversupply, land if priced right can spur commercial and IT realty in 2015, she said.

Kanchana Krishnan, director for Chennai at consultancy Knight Frank India, said the new government at the Centre speaks in the right language: "Business sentiments have improved in the wake of a stable government that is encouraging policies in terms of relaxation of FDI norms, and taking forward investment vehicles like the REITs."

This is exactly the message builders have sent to the state government. In a document to state IT Secretary TK Ramachandran, builders said high land cost is an obstacle in bagging contracts from one large automobile firm and an IT company which are waiting to enter Tamil Nadu with plans to occupy 3 million sq ft.

"Higher acquisition cost of land impacts competitive rental offering for the client when compared to Bengaluru or Pune," developers said in the letter.With IT firms expected to participate in the much-anticipated global investor summit in the state, easing the approval process will make Chennai attractive, builders said in the memorandum.

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